INVENTORIES: Propane inventories finally showed a sizable build this week, adding 2.3M/bbls to their stocks as inventories now sit at 38.7M/bbls for the week ending May 4th, which is just off the 41.6M/bbl level we stood at one year ago at the same time.
Propane exports were 707,000/bpd, the lowest level in nearly a month, while production was at 1,875M/bpd, also the highest level in weeks and above the four-week average of 1,836M/bpd. The four-week average one year ago was 1,770M/bpd, so you can see that production is already stronger to begin this build season than where we were last year.
UNITED STATES CALLS OFF IRAN NUCLEAR DEAL: It was one of President Donald Trump’s campaign talking points, and on Tuesday, the President made it official; the United States would no longer acknowledge the Iran Nuclear pact agreed to with the previous administration and Iran.
This decision has wider implications than just crude oil, but for the purposes of the Propane Buzz, we focus on the crude oil aspects, which are significant, as the United States will ‘re-impose’ crude oil sanctions on Iran, which were in place before the Obama Administration deal was put into place.
Where does crude go from here? It’s going to be fascinating, if not unnerving, to watch.
This, from a spokesman from Saudi Arabia’s Ministry of Energy:
“Following the announcement of the United States of America’s withdrawal from the JCPOA; an official from the Kingdom of Saudi Arabia’s Ministry of Energy, Industry, and Mineral Resources reassured that the Kingdom remains committed to supporting the stability of oil markets, benefiting producers and consumers alike, and to sustaining growth in the global economy. The Ministry’s official added that the Kingdom would work with major producers within and outside of OPEC, as well as, major consumers to mitigate the impact of any potential supply shortages.”
It’s been an interesting few weeks on the crude front, especially with the Saudi’s potentially pushing a shadow media campaign, getting trial balloons out through back channels about their desire for $80/bbl crude, or higher.
Russia has been going along with OPEC (namely the Saudi’s) on production cuts for the past 18 months, as crude oil has risen to three-year highs. However, there has been a good deal of chatter than the Russians are not keen on extending the production cuts very far into the future, while the Saudi’s have strong financial incentives to keep oil prices at present levels in advance of their eventual loss of their ARAMCO IPO.
However, the cure for high prices is high prices, something the Saudi’s know as well as anyone…if oil prices rise too far, too fast, that can lead to a slow down of the global economy as energy prices rise and more money is spent on energy consumption by consumers.
These times makes markets very difficult to predict. It’s believable to conceive out scenarios for both the upside and downside in crude oil, which will drag propane with it.
OPEC will meet in June to hammer out it’s direction for the next six or more months, and this biannual meeting holds more importance than most. Will the Russians push more crude to the global markets to take advantage of the impending shortfall from Iran and the ongoing shortfall from Venezuela? Will the Saudi’s resist the temptation to do the same and not yield that market share to United States producers?
Very difficult times indeed, but I think this move by the United States signals the beginning of the end of the OPEC production output agreement. John Kemp from Reuters, someone I chat with and follow very closely on energy matters, feels the same and he wrote about it this morning, linked here.
Mt Belvieu hovers around 52% the value of crude oil and Conway sits at 43%. There is a LOT of propane buying left to be done all across the country…I would say more so than any of the last several years at this same time. Propane traders continue to search for footing and direction, and there isn’t much to be found these days.
I continue to hear the predictions of strong domestic propane production for late spring, summer and fall, and today’s inventory report was the first sign of that…but how high will crude, and thus, propane go before that production onslaught commences, which would lead to more bearish propane sentiments? Crude is already up well over a dollar today from yesterday, which is clearly a geopolitical premium. Is this a year where propane fundamentals won’t matter because of the potential fireworks in the crude oil sector?
I wish I had the answers for you right now, or was as confident in propane’s trajectory as I was one year ago at this time. The truth of the matter is I have yet to come across anyone who is willing to push all of their chips to the center of the table right now, making a call one way or the other.
I still lean to the bearish side on winter propane values, believing that prices run the risk of being softer in 4Q and 1Q than what you would pay for them right now. As long as it doesn’t lead to increased military tensions, my gut tells me the return of the Iran sanctions will push the OPEC production cut strategy to the brink and beyond, as Russia will want in on the market share, at the least.
This note from Kemp’s article suggests high-level chess games are already in play: “The United States and Saudi Arabia appear to have reached a high-level political understanding in which the United States will intensify pressure on Iran in exchange for Saudi Arabia agreeing to help avoid a spike in oil prices.”
It just may be a white knuckle ride until the production numbers consistently show up and they take the edge off the industry. Be patient where you can.